It is proposed that, just over a year from now, firms that carry out mortgage business will need to be authorised by the Financial Services Authority (FSA). Some critical decisions on how firms will be regulated are now being decided. It is, therefore, important that firms which will be affected by this regime get involved and tell the regulator their views on the proposals. Any firm which thinks it may need to be authorised is encouraged to contact the FSA at an early opportunity.
Although regulation will cover all individual borrowers and trustees, it will exclude buy-to-let or commercial property. The firms coming into the new regime will, therefore, range from traditional lenders such as banks and building societies to firms that lend for home improvements, debt consolidation firms and even some credit card lenders.
The regime extends only to mortgage lending and administration ‘ it does not cover mortgage advice. Mortgage advisers will not need to be authorised by the FSA, but these proposals will have an effect on them.
In the pressure to buy a house it is important to ensure that buyers can get clear information easily ‘ to allow them to understand total monthly costs and compare product features. Unfortunately, this is rarely the case. Instead, potential borrowers find that the information available to them is not specific to their needs and is presented in a wide variety of formats, making comparison difficult. This lack of clear information leads to unsuitable choices ‘ the cost of which can amount to thousands of pounds over the life of a loan. The increasing range of complex products means that there is more need than ever to provide clear information which highlights the terms and conditions of a mortgage.
The FSA is proposing to introduce rules to improve the quality of information and cut through the jargon that borrowers receive. Before making an application for a mortgage, prospective borrowers would, under the new rules, be given a new ‘pre-application illustration’ which clearly sets out the terms and conditions in a standardised format. This would ensure that key information is not hidden in small print and repayment charges would be set out in cash terms and products tied to the mortgage would be clearly shown. Borrowers should then find it easier to compare mortgages and shop around for the best deal.
The rules propose that intermediaries too must provide pre-application illustrations to customers. A group of lenders could, for example, outsource monitoring of intermediaries to a third party.
The FSA rules will also cover mortgage advertising called ‘financial promotions’ in terms of the Financial Services and Markets Act. The scope of the FSA’s powers here, set by the legislation, extend to all credit secured on property. The legislation says all advertisements must be issued by a firm approved by the FSA. The advertisements will also have to meet new FSA rules about their content ‘ these largely reflect the existing rules in the Consumer Credit Act.
Rules to improve the quality of information provided to borrowers throughout the life of their mortgage are also being proposed. This enables the borrower to check they are continuing to get a competitive deal and be provided with regular mortgage statements. Lenders would also be required to treat any customers who fall into arrears or face repossession fairly.
Mortgages are not only taken out when someone wants to buy a new home. Many borrowers remortgage in search of a better deal, without moving house. In addition, mortgages are taken out by borrowers wanting to consolidate existing debts or to release equity. All these types of loan are covered by the FSA’s proposals as long as there are first charges on the borrower’s home and the borrower or their immediate family live in that property.
The FSA has looked particularly at products designed to release equity and provide a source of regular income or a means of investing, such as financing long term care. One past example was home-income plans. These products are often aimed at older people, and they contain different and significant risks for the borrower. Lenders would be required to provide a special version of the pre-application illustration which points out the key terms and conditions of the borrowing associated with such products.
Access all areas
Overall, these proposals are designed to give borrowers the information that they need to make decisions about the mortgage most suitable for them. If there are to be effective, however, it is important that all borrowers have access to that information ‘ whether they buy a mortgage by going into a branch of a lender, by communicating over the phone or the internet, or by talking to a broker.
The FSA will be running a series of seminars around the country during July and August to explain the proposals in more detail to lenders and intermediaries, along with consumer groups and other interested bodies. All those involved in the mortgage market should read the proposals and the FSA encourages them to put in a response to the consultation.